♪ the final countdown >> good morning, everyone. happy new year. not only here, but around the world. the fireworks are starting to kick off all over the place. right now, we can say an official happy new year to the

citizens of new zealand. in auckland, this is where they're celebrating new year's. the light just went down. all you hobbits out there, we wish you a very happy new year. it's coming our way a little later. there go the fireworks. yeah, it is officially new year's eve. >> 18 hours ahead of us. >> happy 2013 to those folks just a few hours away from us. good morning, everybody. i'm becky quick along with andrew ross sorkin. joe kernen is joining us from washington, d.c. this morning along with john harwood. joe, i know you have a huge lineup there. and i know you were up a little late last night, too, right? >> yes, becky, very late. you and andrew, i hope you guys are ready for the heavy lifting. can i ask you a question? are they over the cliff in new zealand, do you know? >> yeah, i guess that's it. >> the sequester would have gone into effect. >> no, that's probably only

affecting us here, but that shows you how close it is. we are -- i guess something could happen at 11:00. we'll see, beck. andrew, good to see you, as well. >> good to see you. >> we've switched. i've got the jacket on, you've got the jacket off. how does that capital building look? >> it looks great behind you. you look very statesman like, absolutely. you have your rise above pin on for this final day. >> he looks like a senator. >> you do have a senatorial look. >> i'm going to retire to the rise above when we start talking about the debt ceiling. we may need a whole new branding campaign. anyway, john harwood is here. it's coming down to lawmakers to try to rise above. we're going do discuss many different angles. coming up in the next few minutes, shelly capito and greg meeks of new york.

in the next hour, tom cole, tom price and chris van hollen. then at 8:00 a.m. eastern, senator ron johnson and bob corker. president obama issued a warning on "meet the press." >> on midnight, december 31st, if congress doesn't act, then everybody's taxes go up. and for the average family, that could mean a loss of $2,000 in income. for the entire economy, that means consumers have a lot less money to make purchases, which means businesses are going to have a lot less customers, which means that they're less likely to hire and the whole economy could slow down at a time when the economy is starting to pick up. >> but after it was all said and done, leaders on the senate floor couldn't get anything done, at least not yet.

>> there's no single issue that remains an impossible sticking point. the sticking point appears to be a willingness and interest or frankly the courage to close the deal. i want everyone to know, i'm willing to get this done, but i need a dance partner. >> this morning, we've been trying to come up with some counteroffice to my friend's proposal. we haven't been able to do that. i've had a number of conversations with the president and at this stage, we're not able to make the counteroffer. >> that's joe biden, i believe. the house will meet at 9:00 a.m. for legislative business. i heard one rally as i was leaving and that was bring in

rg3. i'm ready to bring in one other rookie. if you need an adoptive team, i suggest the redskins. those two rookies, unbelievable. >> i didn't stay up to watch the whole game. >> i did, in fact. exiting the stadium, wow, there -- i think these fans started tailgating at, like, 8:00 in the morning and i think they were tailgating, as they say, all day long. >> joe, you're bringing tears to my eyes. >> talking about rg3. >> oh, yeah. >> it was great. it was great. >> and i guess that's what it is. i hear people talking about john wheaton and -- >> comfortable in that fancy box you were in? >> i was very comfortable in that fancy box i was in. i was comfortable. >> do you want me to show you how comfortable i was? >> what have you got? right here, baby. redskins pajama pants. i was watching the game in

these. >> john, thank you for not wearing those in today. >> i thought about wearing them on the bottom of the suit. if i was a better fan, i would do that. >> oh, my god, there's a pouch in back. though, it's not. i'm sorry. your jammies. anyway, you guys can handle a lot of the heavy lifting today, please, after about a -- >> you look good, joe. you don't look worse for the wear. how late did it go? >> i think we were -- like after 12:00. 12:30. >> you were tweeting me after 12:00. >> why was he up? oh, i know why you were at. >> i assume you continued the tailgating after that, then. >> no. but i definitely got behind some of the other -- i mean, i was not quite up to snuff with some of the other fans as we were exiting. >> those guys had been at it a little longer than you have? >> jae. you definitely don't want to say, hey, watch it, buddy. >> go redskins, right, and get out of the way? >> right. >> it's more dangerous to go to

a game in philly. >> is it, really? >> yeah. they throw batteries and -- >> becky, i'm sorry about rutgers again. we didn't get to talk about that. three straight disappointments. there's always next year. are you ready for the big -- >> ready for notre dame. we have notre dame coming up, too. something else to look forward to. do you guys see any lawmakers? are you for notre dame over the tide? >> yeah. sorry, beck. >> did you guys see any lawmaker else at the game last night? any senators or congressmen? sflo no current ones. i was looking around for that. would it really matter? >> no, it's just bad optics. if you're sitting there sitting on your hands -- you should sit on your hands in your office, right? all right. we're going to continue talking about all this. as we said, we are about to go

over the fiscal cliff. if a deal is not reached to avoid the fiscal cli by january 2nd, automatic domestic and military spending cuts will kick in and the pentagon will be forced to cut $9 million in spending. >> if lawmakers can't avoid the fiscal cliff, they may be able to avoid a different cliff, the dairy cliff. house and senate members appear likely to extend farm legislation for a year, a deal that would keep milk prices skyrocketing in january. we were worried about $6 gallon of milk. it could keep a decades old subsidy from coming back to life. the usda would be forced to buy milk at prices well above what farmers were getting now if the subsidy was revived. it could double the price of moib to $6.12 a gallon.

>> markets have been reacting to each move on capitol hill, but obviously, things at this point are looking like the dow would open down by about 7.5 points. the dow is off 67 points and the nasdaq is down 14.75 points. all the surprised given the late hour that -- >> even if something doesn't happen today, it happens in two or three days. >> right. so if you were looking for a market reaction because a lot of the market iraqis we've heard has said, if highways the case, near not getting it base odd what they're going to see this morning. based on where we were on friday after the market closed, the dow at that point was actually up year-to-date by about 5.9%. russell 2,000 did very well. it was up by better than 12%.

we'll continue to watch this closely today. the one group that you might see interested in seeing a drop in some of these nebs today would be any fun manager who is interested in trying to make sure his fund beats the market performance. if you see a big dip today, it's good news for those people. >> i see a lot of people who say if there is a drop, they think they'll be jumping in to pick up the pieces. i'm not sure how far things could end up falling. >> and it's not just today, it's beyond that. take a look at oil. right now, oil down by about 25 cents. $90.55. and the ten-year notoriety now is yielding 1.711%. the dollar has been hanging in there, too. the dollar is up against the euro and the yen today. right now, the euro is at $131.93. and gold prices, go the gold has at this point gone up about $8.90, $1,664.80 an ounce.

by the way, we have jim o'neill coming up in just a moment. we also have pimco's mow hammel el-erian. steve sedgwick is standing by in london right now. how are things standing by there? >> it's a very quiet session as we saw last week on the u.s. and the european incidentsies. despite the fact that the vix in the united states and the v-stocks and the various volatility measures on this side of the atlantic remain elevated. despite that, we're not seeing a lot of oscillation on the back of, as you said, the fiscal cliff and concerns that we may fall off. does that mean that people are getting complacent? they think even though we might not get a deal in the next 24 hours, we will get a deal fairly imminently. in the meantime, though, this is what we've got in terms of the major european indices. that will open and the germans will come to that in a few

minutes' time it has been up year-to-date around about 6% and that makes the ftse 100 a real lagger compared with some of its european peers. a laggard, as well, compared to the cac 40. we have no fiscal cliff deal as of yet and it is up 1%. that means the cac 40, the french equity market, the blue chips there are up over 15% year-to-date. and a lot of markets are being shut today, including the dax, it pales to insignificant compared to this. the dax when it closed on friday closed out a 29% increase year-to-date. a stunning performance from those german blue chips, especially when you consider the fact that we are in and out of recession in europe, we have a real malaise in front of a lot of sectors such as the carmakeres and that hasn't stopped the likes of vw, the likes of porsche, the likes of

bmw having a very strong 2012. that's despite the fact that gm's opel said it will cut capacity by 20% in 2013. so we are seeing at the moment a real complacency regarding the fiscal cliff, but it's low volumes here as we enter the last hour or so of trading. back to you. >> we also have some news to bring you, broken last night. i expect john harwood talked about it on the special that we did last night. secretary of state hillary clinton is in a new york hospital this morning being treated from a blood clt clot resulting from a concussion you suffered earlier this month. she had been expected to return to work this week. coming up, deal or no deal? we're going to look beyond the fiscal cliff and what it will mean for the markets. we have jim o'neill. he's going to join us to talk about whether he is bullish for the start of 2013 and how much the fiscal cliff is playing into his outlook.

welcome back to "squawk box" this morning. take a look at futures for the day, the s&p is up a little over 7 points as we await to see what happens with the fiscal cliff. >> it is the last trading day of the year. how will the global marketses react to our domestic drama?

calling in right now on the squawk news line is jim o'neill. it's great to be speaking with you this morning. i know we made it through the mayan apocalypse, but will we make it three through the fiscal cliff, as well? >> gosh, i don't know. i keep exchanging my mind about this every day in the past week. what is quite encouraging in a way is that other markets around the world, other important mark particular are trading so much of their own issues that the disappointment in the u.s. has not affected them at all. and while europe has given a bit back, it's barely noticeable. the markets, at least for now, are treeding this as pretty much a domestic affair or as is the case throughout the u.s., an assumption that something will happen later today that will

allow it to -- but, you know, it comes against the background that there is a rotation of stock market leadership shifting away from the u.s. the u.s., the s&p led the world's market rally in 2012. but as we come to the end of the year, even without the fiscal cliff, there's evidence that the markets are taking over leadership. that would be my guess for the early part of 2013. almost irrespective of what goes on with the fiscal cliff. >> you know, jim, i was watching our futures this morning. right now, it looks like the dow would open down about 65 or 70 points. that's the good news, that the market would shrug this off that there will be a deal reached either later today or in the next few days. we've been expecting all along that it would take a big reaction in the markets to get any serious action in washington. if they're not seeing that, that may make it less likely for them to reach any sort of a grand deal. in fact, a grand deal at this point is probably off the table.

what does that mean for the next three to six months for the u.s. markets? >> yeah. waiting to come on the show, i was looking at a chart of the various u.s. markets going back since before the election. and which have sort of gone through some phases. in a way, the markets have sort of factored in from the first immediate period following the election a big deal to resolve the situation in the u.s. is not going to happen. the lying fiscal challenges in the u.s. are not going to be resolved anytime soon. that would be a big surprise and, obviously, if it was one that appeared that didn't damage the economy, that would be enough. but i think most people are resigned to democracy and maybe this is a broader issue about western democracy. unless the markets do put

governments under pressure, it's not easy to come up with such tough positions and i suspect that is going to be the case. it will be a recurring theme through the year, i suspect. >> and that's what i was going to suggest, this idea that we're going to come up with cliff after cliff after cliff, that maybe we're into a whole year of cliff diving, your expectation, let's say we get through the cliff with a baby deal. we've had still a number of economists come on this set and talk about how we could still be -- maybe not in a recession, but continue to see a slowdown. >> well, the other way i've been trying to think about the past 24 hours, you look at the private sector, there are two sources of great encouragement for the u.s. economy, it seems to me. one is the domestic housing story. and the second is, of course, the remarkable thing going on with energy based around shale, gas and oil. if these two sources of strength

persist, you know, is the disappointment about the cliff enough to negate those two things? i suspect the answer is probably not. what it might mean is the difference between an economy that's going in the 2% vicinity of one that could, if a credible deal unleached from the korcht sector and beyond, one that could get back to what most people were -- if not normal, think of the old one in the 3% vicinity. >> jim, to the extent a client were to call you today and say, look, the market is dounl a little bit and who knows if it will be later today. do us this is a buying opportunity, then? >> well, you know, because i look at, obviously, things in such a global context, in any case, because the u.s. market has rallied so much from 2009, and as you guys, i hope, recall, i've been in the bull camp ever

since, measures of valuation in particular so-called capital adjusted p/e ratio tight model which is a very conservative approach. the u.s. market isn't cheap any more. i don't think the u.s. market itself is going to be the sense of global action going forward and particularly what's going on policywise in japan and the whole trade. fascinating to see china hit a few weeks post leadership changes, first time this year the markets had more than 10% rally there. and the signs of europe's issues being if not resolved, certainly more minimized in terms of stress. so i think we're going tothz a lot clearer signs of powerful rallies coming from the rest of the world in 2013 which will make it somewhat different than 2012 and to some extent the previous two years, as well. >> joe is down in washington wauchg all of this first hand and i know he has a question for you, as well, jim. >> feeling all the different things coming in. >> that must be a real challenge

for you being down in d.c. how did you get that straw? >> yeah, it is. i can take it for about 24 hours. i am feeling a lot of what's happening. and in the last 2 1/2 years or so, the poisoned atmosphere down here just to try and do anything is becoming really apparent. we put the sequester because it was so hard to try and do anything last time to force us, now we're not really inclined to do it again. my question, even if we do get a deal, a lot of the extra tax money we get is probably going to help off set the sequester. is there a day of reckoning, jim, and i read krugman today who, you know, now he's mad at howard schultz because he wants to, i don't know, do something with the deficit near term. can we go another five years without having some kind of reckoning in the bond market or somewhere else? >> you know, the european crisis

has been quite instructive for my mind in this. but the reality is democracies don't really take tough decisions until they're put under enormous pressure from some external factor, in this case, the stock market. i find myself -- and i still think it today -- that oddly in the events of europe come out of the germans next door with something much more clear about a nurch path of the eurozone, and so people did start to believe the euro is a true global reserve currency to compete with the u.s., that might be the point where the u.s. starts to come under sear use pressure from the markets. of course wrb to some degree, the past -- well, longer, going back to august of last year, the u.s. had this strange benefit that this persisting european crisis is around and sort of

global investors can't deal with two huge clem mas at the same time. but i think that would seem to me the period where things become more specifically risky for the u.s. and it may well be that until the bond market forces the pressure, where is the incentive for politicians to take tough decisions? >> jim, if that's the case, we've been watching the euro and it's been hard to understand why it's been so strong against the dollar. what do you think happens to the dollar if we get a year down the road or further and it looks like europe's problems aren't as big as they are today? then what happens? >> you know, i think the dollar outlook is looking -- is quite mixed. because there's various forces going on all over the world. it does seem to me that the draghi moments earlier this year, i thought within minutes of seeing it and i believe since that that was a major changing point, at least in terms of investors, instead of selling the bad news, as you know, the

buy on the bad news dips in the euro area because the europeans and the german ves supported the ecb, despite the controversy. basically, they're going to do whatever is necessary to keep this thing in existence. and i think out the margin, it is already making investors around the world, including some very conservative and large ones i know, think that europe is now a better place to invest than the u.s. and i suspect that picture could slowly build more and more, which might seem odd to some of your viewers and listeners, but that would be my suspicion as we go into 2013. without that competition, i'm not sure where the u.s. really does come up with a powerful deal to solve its fiscal issues and if you reflect back on some of the problem areas of europe, even though they're all still mired in very weak growth, probably recession, there are positive signs going on in terms of labor reform in the likes of

portugal, ireland, some even to some degree in spain and greece. and that wouldn't have happened without the pressure in the markets. >> obviously. jim, we want to thank you very much for calling in on this new year's eve and wish you a happy 2013 to you, as well. >> happy new year's to you guys. good luck to you. >> things. coming up, we're going to calm to some politicians and congress people. we have shelly moore-capito and congressman greg meeks of new york will join us on the show to talk about the biggest sticking points. at the top of the hour, vice chairman and republican policy committee chairman tom price will be our special guest. "squawk box" coming right back. this is america.

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good morning and welcome back to "squawk box." here on cnbc. you've got to lost that shot. i'm joe kernen. along with becky quick and andrew ross sorkin. back in we call it ec, englewood cliff, new jersey. i'm in washington with my friend, john harwood. i don't want to pretend there's no bengals, but we are basking. i'm sort of adopting the reskins, rg 3. lawmakers are back at it this morning trying to come to some agreement to avoid the fiscal cliff. senate majority leader harry reid says there's still significant distance between the two sides, but talks are continuing. we'll have more on the fiscal cliff saga in a moment.

elsewhere, private equity consortium has struck a deal to buy investment banking firm duffs & phelps for $665 million. as part of the deal, duff & phelps is permitted to seek higher bidders until january 8th. there's a potential merger between amr pilots group. this would combine the two carriers, take amr out of bankruptcy and finally prove appeared rue ross sorkin correct in saying this was going to happen all along. were you involved in the negotiations? you were almost an investment banker here, urging both sides to do this, weren't you? >> without a fee, though. >> what are you talking about without a fee, though? do i work for free? come on. >> no. i've seen you work. >> thank you. >> what did you do, tweet about

some vanguard -- i watch you work. i'm learning from you. all the angles, you're amazing. did they settle that thing? ye7. i'll settled up. let's talk about that during a break, though. >> all right. very good. okay, beck. >> guys, let's get a check on the markets this morning. if you are waking up realizing that the countdown is on, this is the last day before the fiscal cliff. and waulg seems nowhere near any sort of a deal, you might expect the markets would be tanking. not the case. they are looking lower. dow futures down by about 56 points. s&p futures down by about 6.5% or 7 points. if i were expecting a large drop, not the case just yet. you have a few more days before things get treacherous. and maybe that's what the markets are counting on, that and there could be some 11th hour deal that comes through today. in any case, you see the markets reacting calmly. right now in europe, you can see that france is higher. the cac is up by 1%.

>> you get rid of that 75% tax and that's what happens. >> exactly. the court ruled that unconstitutional, that 75% tax the way it has been laid out. maybe that's why you do see that cac moving higher there. also, take a look at what happened overnight in asia. the shanghai composite was up by 1.6%. japan, the nikkei, up by 0.7%. a lot of these markets are probably closed for new year's. also, take a look at the oil board today. you'll see that oil prices are down by about 35 cents, $90.45 a barrel. and the ten-year note, the yield was around 1.7% the last time we checked. the dollar has also been reacting rather well. all things considered. right now, the dollar is continuing up against most of these currencies. dollar versus the euro, euro is at 1.3193. dollar/yen is at 86.12 and gold prices have been a little higher

this morning on, as well. you can see they're up by $5.70. $1,661 an ounce. joe. >> thank you. lawmakers are continuing fiscal cliff discussions this morning. let's get to john harwood with an update. i have now am viewing the ball falling tonight. if there is not a deal -- and i don't know, you're going to tell us what the chances are, but that gives a whole new meaning as that's coming down. we hit the cliff when that -- >> that would be the bottom of the cliff. >> this is the first time ever when it's more than just ushering in a new year, but it would usher in serious fiscal head winds. >> it would, but there's still a chance this is going to work. >> have you talked to anyone this morning? >> i did. i got a message this morning on my blackberry about ten minutes ago from our senate republican source who said talks with biden were good last night. they went late. that is a promising sign that there is still a chance. they didn't break down, but there's still a chance that

biden and mcconnell can come out with some sort of a deal, maybe the income threshold would be $400,000, maybe it would be $500,000, but it looks possible that they're going to have something to announce later. we don't know that for sure. i suspect if they do come out with a deal, congresswoman capito would like it better than congressman meeks. but we will see. >> john, the latest thing we've read, i'm not a smart man, but if it was 450 and one was at 550, wouldn't 500 -- wouldn't it seem like that -- isn't that in the middle? >> absolutely. >> if it's that boiig of a deal- >> the logic of 400 is only one rate gets affected. the 35% goes to 39.6%. >> so it's easier. >> it's cleaner. if they go to 500, democrats will come back in january and february and look for more

revenue, perhaps through deduction capes and some of the things falling by the wayside. but i think the markets would take some comfort from the fact that at least they can do this much. it's not a lot, but it would be something. >> hey, john, the one thing i was thinking of even if they do reach some sort of a deal is in the senate, is it a given that it passes the house? >> not a given, but i think the chances are pretty good that if mitch mcconnell comes out, strikes a deal, blesses it, it gets 60 plus votes in the senate, which means some -- a slug of republicans are going along with democrats to vote for it, they might lose some democrats on it, i think then it would be very difficult for john boehner on the last day to keep that off the house floor. john boehner has followed what denny hastert used to impose as the majority of the majority rule. you don't bring something to the floor unless most of your members are for it. i think john boehner in this case would be willing to set that aside. he would have something else for his members to vote for, which

would be more favorable to those die hard conservatives who oppose the deal, but i think he would put it on the floor and i think eld pass. >> joining us now on the set is republican congresswoman shelly moore-capito and democratic congressman greg meeks from new york. congresswoman, i think he could do that and bring it and still be fine on january 3rd. is that your view? he would be re-elected speaker. >> i think he's going to be re-elected speaker, regardless. but i think there is a will in our conference, in the republican conference, to act, to have something on the floor to react to. i would say that it could be that it comes back from the senate and we act on it, but we amend it and change it. i wouldn't say it would definitely be the end game. that would be a nice, neat package to tie et up like that, but i don't think that's necessarily going to happen. >> congresswoman congressman

means, what does this mean about the rules? the house has to pass it and then -- >> i think we're at the point whereas the hope lies with the senate. i do believe that my colleague, good friend shelly and the rest of the republicans are not together. and so we need a deal. i think you are absolutely right, we need the senate to pass something. we're senate republicans and is maybe the senate republicans and the democrats there are talking and hopefully then we can get something back that would allow the speaker the freedom to put a bill up on the floor to have a vote and then i think you see a bipartisan vote if that happened. if we have all kinds of amendments, etcetera, do we create a bill that goes back to the senate and we don't have much time to debate amendments, etcetera. >> it is at the top right now. >> i want to make sure we don't

overlook a bit of news. you were saying you know john boehner will be re-elected, regardless. does that mean you won't permanently challenge him -- >> i don't think he has to worry about that. one of the things we're going to look carefully at is suspending issues. the president and the senate has not been willing to engage on this spending issue to grasp the part of the cliff that i think is probably the most dangerous part and that is this debt and deficit issue. and a lot of us in the house side really want to look at that very seriously. so that will be part of what we scrutinize when the senate sends it over. >> i'm wondering what month, what year. now i'm starting to think that it's just -- the atmosphere is not right for anything happening, even -- i don't know, even in the first two months of the year or a grand deal of any consequence. >> and i'm one of the democrats that signed on. i thought i would want to do a grand deal. i don't want every two months to go back and be on a cliff,

having another debate about the debt ceiling and, you know, we're back here again. i don't think the american people want that. i think if there was a conversation between the president and the speaker a week or two ago before the speaker went to plan b about a bigger deal with the president did make concessions, where he's willing to talk about social security and this some things that i and others of my colleagues were not happy with, but that broke down. i would hope we get to a point where we can have a deal and i think the speaker's plan b was to show that at least some of the republicans would say that would be some revenue, the big breakdown had been no taxes on any americans. and i think that's a problem. >> i want to ask congresswoman decapito, who we know is very smart because she went to duke, president obama said he's not going to negotiate on the debt limit and white house aides tell me he's serious about it. what are you going to do when the debt limit rises in a couple

of months, you want to negotiate on that and he says, sorry. >> i find it interesting that tim geithner says the debt limit is up at the end of the year. really? throw that one out. he voted not to let president bush have the right to raise the debt limit. i think this is a check and balance that we need to have 234 congress. i don't think he's going to get his way on that. i think the speaker did -- >> do you think he will buckle and negotiate? >> he's going to have to because he needs that. and i think that does provide leverage in the congress. it is ugly and i don't want to go through it again,=/$fnñ"3g-u

our thanks to congresswoman capito and congressman meeks. >> i think you have an opportunity while you're there to negotiate all this yourself. you could play the role of -- anyway, comments, questions about anything you see here on squawk, send us an e-mail. >> the fiscal cliff, what would

a new tax plan mean for small companies and their employees? we're going to get that story when we return. as we head to a break, check out the futures. we have red arrows. they continue to be red arrows. nasdaq off about 12.5 points, the s&p 500 off a little over 6.5 points. we have more coming up on squawk after this break. [ male announcer ] you've climbed a few mountains during your time. and having an investment expert like northern trust by your side makes all the difference. we add precision to your portfolio construction by directly matching your assets and your risk preferences

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welcome back, everybody. happy new year. obviously, if you look at the top of the screen, you're going to see green arrows. but remember, you have to subtract the futures from fair value and take a look at where things really stand.

there are red arrows when you look at the math on this. the dow futures are down about 6/0 points. that is nowhere near as bad as people were expecting, given how close it is to going over the fiscal cliff and how it looks like we don't have any sort of a solution just yet. >> sad to say. as the fiscal cliff ticks down, we're going to the real world to talk about small businesses gearing up for tough times and what lies ahead in 2013. joining us now are darren harris, ceo of primarywells schools and derek jones, ceo of bookkeeping express. give us a sense if you could, darren, wa is happening to your business as a function of the fiscal cliff. you're a private school that the franchise -- how is this going to change things for you? >> sure. we have roughly about 250 locations across 17 states. much of our growth comes from our franchise owners reinvesting in their staff. and hiring. and second and third locations.

so what we're seeing is an apprehension of them to go and invest in additional locations. they're doing it. we're going at record numbers, but at the same time we're hearing across our system apprehension and fear of what is that going to impact their business and how it's going to impact their business. >> what kind of contingency plans have you made if you have made any? >> definitely we have made contingency plans in trying to create ways for reinvestment for those who want to grow so we can continue to create jobs. we've created investment into online training systems so they can give back to the teachers. so we've tried to create multiple incentives out of franchise owners and have them hiring people and creating jobs for free. >> now, you do prenursery. are parents acting any differently? are they buying less program? >> fortunately for our business, we've seen growth in parents. but what we're hearing and what

we're seeing is they're switching to more of a part-time care. pokes in this country are committed to education and educating their children. the last thing they want to go is child care. but they're going to more part-time care. that creates a different view to our franchise owners and how they hire people and hours that they can provide to staff that they're limiting. >> greg, am i wrong in saying that i would assume if you're in the bookkeeping business, this on a short-term basis has to be a good thing? >> it actually is a great thing. yeah, we hit the market in two different areas. one, we obviously offer an opportunity for a group or individual to get into the business and start a career or wealth builder. but obviously, we have a touch with the end users, the 30 plus million around the u.s. and soon to be canada, as well. and supplying that small business owner with not only a bookkeeping service, but also

data and analytics to help them run the business and make some business decisions as they grow. >> now, you're a franchise model. if, for example, whether it's dividends or capital gains and that goes up, does that change the game for you? is that going to significantly shift your business? >> well, you know, for us, bookkeeping express, our growth has been phenomenal last year and way ahead of the curve. but franchising in itself, you know, there's over 160 projected new jobs being created by the franchise industry. there's 18 million jobs rmted to franchising throughout the u.s. so for us, we've actually seen an uptick. the small business community is in flux. they don't know what to do. they're sitting back waiting tore things to happen. our friends up on the hill make decisions and they're relying on hopefully sound business advice, which is what booking express brings to them. >> we're going to leave it

there, guys darin, greg, thank you for joining us this morning and we'll see whether we go over the cliff together. we can hold hands. >> it is the final trading day of 2012. that mean we'll be watching closely to see what happens today. will it pay to be bullish or bearish in 2013 or at least for the start of the year? we have pimco's mohamed el-erian later on in the program. stick around. so we have ongoing webinars and interactive learning, plus, in-branch seminars at over 500 locations, where our dedicated support teams help you know more so your money can do more. [ rodger ] at scottrade, seven dollar trades are just the start. our teams have the information you want when you need it. it's another reason more investors are saying... [ all ] i'm with scottrade.

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welcome back, everybody. if you are just waking up, again, the dow futures are lower, but not by as much as you might expect. right now, about 61 points below fair value. s&p futures at this hour look like they would open down by about 6.5, or 7 points if the market were to open right now. we'll see how things shore up as we get closer to the opening bell on this last trading day of the year. also when we return, we have the nation headed towards the cliff. we need twice the firepower this morning. so we have both tony pratto and jerry bernstein joining us on the fiscal fun right after this. good morning, guys. happy new year to you both. plus we have the vice chairman of the budget committee, congressman tom price of georgia. he'll be giving us his take on the negotiations. the way it moves.e announc] the way it cleans. everything about the oral-b power brush is simply revolutionary. oral-b power brushes oscillate, rotate and even pulsate to gently loosen and break up that sticky plaque

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looking over the fiscal cliff. >> we're running out of time. >> if congress doesn't act, then everybody's taxes go up. >> can the leaders rise above to avoid a financial fiasco? your money's at stake and we're following the latest details from the nation's capital. joining us this morning, former white house insiders tony fratto and jerry bernstein. >> and the wait and see game for investors. get the wall street fratsy that could boost your financial future. have a happy new year. the second hour of "squawk box" starts right now. ♪ good morning, everybody. welcome back to "squawk box" here on cnbc, i'm becky quick along with andrew ross sorkin here at cnbc headquarters. joe kernen and john harwood are in washington, d.c. this morning and our guest host on "squawk" today, former white house deputy press secretary, tony fratto,

and former economic policy adviser to vice president biden, jared bernstein from the center on budget and policy priorities. both of them are cnbc contributors. happy new year. >> happy new year. happy to be here. >> on fiscal cliff day. >> we need you here because there's a lot to talk about. we need some solutions. investors obviously are keeping watch on the fiscal cliff negotiations. we've been watching the futures this morning and believe it or not, it's not as bad as you might have expected. the dow futures are down by about 62 points, s&p futures off by just over 7 points. nasdaq down by about 14. we're going to hear more from john in just a moment. he has been reporting that there are some encouraging signs in those talks between gop leaders and vice president joe biden. maybe that's what the people in the market are holding out hope for, too, that there is some final solutions reached just before we go over the cliff. lawmakers did get some work done over the weekend, despite failure to solve the fiscal cliff issue. senators approved antitrust attorneys william barrett to head the justice department ate antitrust division.

also party leaders agreed on a farm bill extension that would head off a big jump in milk prices. lawmakers still need to vote on that agreement but at this point, at least there is something that they can take a look at. in the meantime, auto industry sales are headed for their best year since 2007. forecasters now say the total sales for 2012 should top 14.5 million cars and trucks. analysts say even more encouraging is the fact that sales increased steadily throughout the year, so that means we're ending things on a good note. also, finishing up a good year the movie industry. hollywood.com estimates 2012 ticket sales came in at a record 10.8 billion dollars. that's 6% higher than last year. and it beats the former record of $10.6 billion set back in 2009. joe? >> okay, beck, thanks. let's get to our next guest. among those working on a deal to avoid the fiscal cliff, joining us in washington, congressman tom price of georgia, chairman of the republican policy committee, and he will soon be the vice chairman of the budget committee. so, the scenario that we're

seeing, congressman, thanks for joining us. >> good to be with you. happy new year's eve. >> happy new year. i know the ball is coming down with all this new significance to the ball dropping, whether we go over the cliff. the last thing we heard, the senate may be optimistic, put something together? >> sure. >> passes it with some bipartisan support. does it get brought up in the house in a way without too many amendments so that it doesn't repass the senate, and then is it brought up by speaker boehner and passed? >> i think the speaker's commitment is to bring up whatever the senate can pass. remember the house has acted in may, and august and september to try to make certain that the tax rates didn't go up on any americans. that we address the spending issues, brought spending down so we can address the deaf kit. the real question is whether or not the president is going to weigh in and push the democrats in the senate to move forward with a bill today. if that happens, then i think that we can -- that we can solve this current challenge. >> if joe and mitch mcconnell come out with an

agreement that sets threshold for income tax increases at 400,000, or 500,000, how do your members, who rejected the plan "b" with a million dollar threshold, how do they react to that? how do you react to that? >> i think we split. but if we allow the house and the senate to work, which is what hasn't happened in this town for a long time, then i think that there's a bipartisan group that would potentially address that in a positive way. or amend it at the house act, amend it and send it back to the senate. >> could you vote for a 400,000 or 500,000 threshold? >> no. but i think that raising taxes on anybody at this point is a terrible idea. this economy is in the doldrums. and we don't have a taxing problem. we've got a spending problem. so we need to decrease spending. >> -- bipartisan vote and john boehner could retain the speakership if that happens? >> i don't think that's the issue. i think the issue is spending and whether or not we're going to address spending. and if that's the bill that comes up, and you let the house work its will, you know, it's december 31st. my suspicion is that it would pass. whether it passes with my

support or conservative support is not the issue. >> and boehner's speakership? what about that? >> that happens on january 3rd and i don't see that it's being threatened. >> even if it goes -- if what you said does pass, then he'll still be -- we heard that that would be -- the bipartisan deal that maybe that could threaten if you brought -- >> there's a lot -- what we do kns hasn't done its job. the president has refused to lead. and what needs to happen on this day for the american people is for us to move forward and try to solve these challenges. >> very skillful, john, and you might disagree with me, that we really have focused only on the making sure that the middle class doesn't have a tax increase, and that's what every american thinks is happening. the president's fighting to make sure that middle american doesn't get a tax increase. nobody is really focusing on, really just been fighting to raise taxes on the wealthy. but it's framed, it's almost

like the converse of -- i mean that is what we're doing, right? >> and the other -- >> because we've left the context of a big deal. if we go back to a big deal, it will be a broader discussion. >> that's really what the argument is. the republicans don't want to raise taxes on anyone and the president, out of all of our problems, all the things that we're doing, that we're focusing on, is the 250. >> correct. at this point. >> that's all we're talking about. >> remember, the quantitative issue here. the president's tax increase raises money to run the government for eight days. not eight weeks, not eight months, not eight years, eight days. this is all political. this is not policy. if it were policy, we would be talking about substantive changes, like decreasing spending. we've had four straight years of trillion dollar plus deficits in this country. out of this administration. clearly we can't continue that. >> but why do you say all political? the president is saying, we need more revenue than we're bringing in right now and he's standing up for that principle at this moment. he's not saying we don't need to

do something on entatements, although that's difficult for him, democrats difficult, for republicans, too. remember, your party's nominee ran against president obama for cutting medicare. remember that? >> absolutely. what we did is a real solution. the way he cuts medicare is to cut the doctors, as a physician i can tell you that, and makes it so that the patients, the seniors, don't get the kind of care that they require. >> he cuts medicare advantage. >> no. the independent payment advisory board was charged with cutting $500 billion from medicare. you don't do that without decreasing services to patients. but again, the president's solution -- >> so you think the better solution is cutting benefits to medicare beneficiaries? >> oh, on the contrary. the better solution is premium support to allow seniors the option to have the health care that they choose, not that the government forces them to have. there are wonderful, positive solutions out there. in fact we have put them on the table and passed them through the house of representatives. which is why it's so frustrating for our side, because we've seen these bills sit over in the senate for month after month

after month with no action. no action by the democrat senate. >> well, it's been interesting to watch. i don't know, do you have a pr firm? or can you fire the pr firm t t that -- because it's amazing the way that it's been the optics of it, the way -- >> it's the bully pulpit. and it always has been the bully pulpit. but what the american people will appreciate, i believe, is this current challenge isn't solved, is that they will see that the administration has allowed more taxes to go up on virtually every single american and not done a thing to decrease spending. >> now remember one thing, though, it's not just a bully pulpit. president bush had the bully pulpit, tried to go for partial privatization of social security, your republican colleagues would not take it up in the congress. >> well, there's -- >> it was killed by a republican congress. >> that's not my recollection. my recollection is that that we fought diligently across this country for four or five months, and, and we could not get any cooperation. >> tom davis your colleague, who was the chairman of the house

republican campaign committee, said we are not touching that. >> and -- that's because -- that's the way it played out over those four or five months. remember what we've got now is a much different problem. that is four straight years of trillion dollar plus deficits run by this administration. you can't continue that. we're $16 trillion dollars plus in debt. >> congressman price. georgia tech today, i guess, isn't it? that's the latest today. >> georgia tech later today. >> who are they playing? >> s.c. >> ooh. >> should be fun to watch. >> good game. >> will be a good one. all right. we appreciate it. >> thank you. >> send it back to becky. i got a couple of things, that i guess we got to go. fratto, i don't know if you know, is he going 20 -- he can either adopt the bengals, which would beat -- or i think that the redskins are imminently adoptable. >> how could you do that? look you've got a team in the playoffs, how could you adopt the redskins? i hear you -- >> i can have one in each conference. >> no, no, no. you're lucky enough to have one

this year. >> you cannot get caught up in the -- >> the steelers do not want to play this washington redskins team. >> you know, i saw -- i saw redskins fans, you know, tweeting congratulations on division champions and i thought do people actually keep track of division championships? super bowls, division championships, i guess you can hang a banner or something. >> you need something to feel good about. >> why not? division championship, sure. >> you got bernstein who apparently worked for the guy, he's doing the guns, he's doing this, but biden's everywhere. my god he's like all over the place. >> and offered me a sellout. >> he's a dealmaker. >> one last thing, becky, speaking of twitter, and i'm not going to dwell on this, but do you like the red dye job that i did as i was -- when i got off the acela, i dyed -- it's weird. should i dye -- a lot of these people are telling me, should i dye it back or should i leave this new dye job? >> it is interesting that you do

that every time. >> do you like it? >> i do like it. it looks pretty good. >> i might keep it. i might keep it. all right, thank you. >> not bad. joe, you can listen in. you and john can continue in this, as well. we're going to bring the discussion back to our guest host today, tony fratto who is here and jared bernstein. guys, we're down to the wire. i did not expect to get to this point. jared, you've worked very closely with biden. what do you think is really happening? >> well, the vice president and senator mcconnell have a long history of working out deals. they've been in the senate together for years. biden used to say this this congress ain't your grandfather's congress. when guys like that used to get to the and work out deals, and it was mostly guys, the caucuses would kind of fall in line behind them. not exactly the case today. especially in the house. >> especially in the house. if they work out a deal, that's my question, can they possibly work out a deal that satisfies the house? >> i don't see it. look, i mean the deal that we're talking about, and i think that john talked about, about some

optimism last night, see some snippets of it in some of the news coverage overnight, is essentially some deal to increase taxes, to put off sequestration cuts, and to add some additional spending in the form of extending unemployment benefits. so you're talking about bringing to the house floor a bill to raise taxes, and increase spending, and put up -- >> they say forget about it with boehner. >> i just don't see it in this context. and you know, if people aren't -- >> -- thought that we would -- >> we've been saying this for awhile. >> and i also want to add that, i know that it's hours from the deadline. i actually think that there is a better deal to be had on the other side of the cliff, probably than cramming something in the last hours. i don't think there's any magic for the economy -- >> -- better policy? >> -- sense that we go over, that you get a quick deal? because i've talked about, my worry is you go over and you get a slow deal come end of january,

early february, or possibly even longer. look -- they took three months to get their act together now. >> first of all there's a pretty easy answer for that. i also want to tell you i worry about that, too. i think if we go over for a matter of days or weeks i don't think it's going to hurt the economy much. i don't think it's good. i think it's bad. it's better than a lousy deal now. but if we're here in february and march that starts to feel almost recessionary. here's the thing, once you go over the cliff, tax rates automatically reset. there's no republican whose fingerprints are on higher tax rates. then on january 4th, after boehner's re-elected, as leader of the house, on january 4th, every republican can vote for a massive tax decrease on 98% of households. >> that's true. >> so that's the mechanics. >> but i also think it's more than just a parlor trick, right, of like getting over the deficit. >> that is a parlor trick. >> yeah, it is a parlor trick and it's not really going to fool anybody. you are in a better place to actually do some things with the tax code from the clinton-era tax rates than you are from the

bush rates. for the rest of my life i'll be defending bush tax rates. that will be my job forever. i love them and i love them forever, right? but you get to the clinton rates you're in a better position to do some things on tax reform, and for the budget projections are easier. >> all right. we're going to continue this conversation, because tony and jared are going to be with us for the rest of the morning. obviously we've got a lot to talk about. >> still to come this morning, one of the biggest players in the private equity game. going to tell us if going over the cliff may slow down the pace of the deal making. then we're going to talk to budget committee members from both sides of the aisle. representative chris van hollen, and maryland -- and tom cole of oklahoma. we're going to -- they're going to join us on the set at 7:30 eastern time. and check out the futures this morning. does look like the implied opening is getting worse. dow could open off close to 80 points.

welcome back. dow futures down 78 points below fair value. s&p futures down over 9.5 points. a little weaker than we saw earlier this morning. we'll continue to watch as the nasdaq is down by just over 17 points. >> wall street, of course, waiting for a fiscal cliff deal to get done, if one gets done at all. here with us now, daniel arvis. you could be a partner or president. i remember when you came on and you told us to embrace the fiscal cliff. are you still -- are you still wanting to embrace the fiscal

cliff? >> yeah, i am. >> is that a good thing? >> i think we have to step back and think about what we're talking about here. we've gotten so caught up in the minutia and in the language that we've imposed on this whole debate that we forget the fiscal cliff is not some sort of disaster. it was put in place to solve a problem. or at least to create a basis for solving a problem. which is -- >> a basis. not solve a problem. >> which is to reduce the deficit. >> right. >> so the way these policies got into place, the so-called fiscal cliff policies, is congress set itself a sort of backstop and said, look, if we can't do it in a better way, we're going to have these across-the-board tax increases, and spending cuts through sequestration and that's going to allow us to cut the deficit. now what we've reduced to the debate to, and i'm sure jared is going to agree with me on this, we've reduced the debate to, can we raise taxes on the rich and continue to spend money? that's really what the president's agenda has been.

let's raise taxes on the rich and let's continue to spend money. let's forget about cutting expenses. >> on the argument, though, that doing something else would hurt us too much, at least in the short-term, right? >> we have to think about the short-term and the medium-term. i'll tell you what's going to hurt us in the short-term. if we do nothing now, or if we override the so-called baseline policies, the fiscal cliff with some sort of mini deal to -- >> you think the market -- >> -- save the tax rate increases on the middle class and that's all we do, we're going to be in big trouble. we're basically going to be inviting another credit rating downgrade. we're going to be inviting a higher cost of capital for the united states borrowing, and we're really going to be hurting the economy, not to mention starting the year on a footing of extreme uncertainty as to how this is all going to end, which is not going to help corporations make the decisions to start investing the money that they have -- >> jared, jump it, but one quick

question. is the suggestion that we could do better -- that the mt actually would like to see this version of the cliff more than they'd like to see the baby deal? >> i don't know. i can't tell you what the market would like to see. but i can tell you -- no, i think the market, because the market thinks in a very, very short-term way, the market would be very happy to hear any announcement on cnbc that we've come together and we've avoided the fiscal cliff. but avoiding the fiscal cliff is really not the goal here. cutting the deficit is. this is a case of gigantic political friendly fire in my view. we're targeting the wrong enemy. we should be targeting the deficit. >> i've read, dan, more carefully and it's extremely insightful. and one of the things that i take from you is that you're a markets guy who thinks about macro, and not just u.s. macro, but global macro. what i don't get about what you're saying now -- one thing i get very much about what you're saying now is a small deal doesn't solve anything except

the immediate cliff problem and that's not the only problem we have. it's actually relatively minor, i agree with you. but if we engage in $500 billion fiscal contraction next year i think we're going to have a recession. as a guy who pays attention to macro, how does that help anybody? >> well, look, i actually -- one of the reasons i said, and it was a provocation of saying, the fiscal cliff, after the election, my view of where this was going was exactly where we are this morning. which is probably why you invited me to be here this morning. >> yes. >> that is we're not going to get anything done. we're going to go over the fiscal cliff, so let's think about what that means. the good news is that we go over the fiscal cliff, we actually cut the deficit immediately by 40%. it's a good outcome by a very, very messy means. nobody likes the means. that's the reason why we're supposed to do a better job. but we weren't supposed to override -- >> but we're not going to stay there, right? >> exactly. we're not going to -- >> we weren't supposed to override the baseline policies and just forget about cutting the deficit. the reason why we have the baseline policies is, we're supposed to cut the deficit. so now we're going to go over

the cliff, we're going to go over the cliff. but we're going to cut the deficit by 40% and then everybody's going to come back to the table and say this is horrible. taxes on the middle class, taxes on the rich, across the board spending cuts on defense and everything else. let's get serious and figure out where we should really cut experiences and where we should really raise taxes. raise taxes on the higher brackets. don't raise taxes on the middle class and we're going to get -- >> how does this ultimately get back -- >> you're telling a story we're a very dysfunctional congress all of a sudden becomes functional. >> -- senate in the right place -- >> exactly. the fiscal cliff policies were designed basically by congress to save itself from itself. >> right. >> and if it takes effect -- >> not aspirationally but actually. >> actually as a backstop. now everybody in this whole, let's avoid this fiscal cliff -- >> as a -- >> we're going over the cliff. we've forgotten what the policies were there to do. >> as a markets guy, if there's

a viewer who has money invested in the market, should they be invested in the markets if they've got cash sitting on the sidelines and see futures down today, should they say should i be buying into this? things are going to be okay? >> here's the question, you're asking before, andrew, i actually think, and probably a minority in this regard, it doesn't really matter what i think, the market may not agree with me. i actually think that fundamentally there's so much underlying strength in this economy we are in a position where we could actually go over the fiscal cliff, take those baseline policies, take the tax increases, take the messy spending cuts, and the economy will still survive. people will go to work, they'll be okay, have to pay more taxes, that doesn't good. people will continue to consume because the underlying strength in the economy in my view is being underestimated by people right now. >> okay. dan we're going to leave it there. thanks for coming in. happy new year. >> happy new year. >> let's see if we go off the cliff. when we come back, will going over the cliff and refusing to rise above have investors running for the gold

mines and leaving stocks behind? hasn't been the case so far this morning. not what a lot of people had been looking for. but we'll see as we get closer to the trading open. we have pimco's mohamed el-erian about whether this will be the new normal if the nation goes over the fiscal cliff. [ male announcer ] how do you trade?

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welcome back, everyone. venezuelan president hugo chavez suffering more complications related to his cancer surgery. the state of chavez's health. chavez first announced that he was battling cancer back in june of 2011. he is being treated in cuba. joe? >> okay, beck. next the clock is ticking. and the ball, you know, is set up to count down the cliff at this point. so can both sides find a way to strike a deal? congressman chris van hollen of maryland, he likes, you know, you live here, so you're here all the time. and tom cole of oklahoma will bring some of the negotiations to "squawk box." next.

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welcome back to a special edition of "squawk box." here's joe kernen and john harwood, live from our nation's capital. >> we're going to see the sun coming up in 2012. welcome back to "squawk box." in the headlines this morning, u.s. stocks coming off five straight days of losses. six of the past seven, as

investors wait for some sort of solution to the fiscal cliff issue. however, the major averages will all finish, i'm afraid to even say that, for 2012. among private equity groups striking a deal to buy duff & phelps for $615 million. that would be 19%, that's a premium over where it was on friday. duff & phelps get a so-called go shop period along with the deal. that alyles them to seek higher offers between now and february 8th. and if lawmakers wind up with the term kicking the can down the road they may want to come up with a different way of saying it. that phrase is on lake superior state university's annual list of words to be banished. other entries include spoiler alert. trending. and bucket list. not surprisingly, the phrase that got the most nominations this year, of course, fiscal

cliff. fiscal cliff got the most, to ban. john? >> how about hail to the redskins? >> that's said so rarely in recent years i think that's fine. no one has heard that in decades. >> they'll be hearing it a lot. >> ten years. >> so exciting. he wasn't even 100%. >> no. no. >> which was electrifying. >> seahawks will find out next week. >> okay. >> so a couple sources telling me that last night's negotiations between vice president biden and gop senate leader mitch mcconnell showed some signs of promise. joining us now, two members of the house budget committee. ranking member chris van hollen on the democratic side. on the other side of the aisle, tom cole of oklahoma, a republican. good morning. first of all, let me ask both of you, what do you hear from the biden/mcconnell talks last night? >> well, first of all, we'd like to ban the term fiscal cliff, along with lake superior, we'd like to ban it by midnight

tonight by trying to get some kind of agreement. look, i think the chances are still about 50/50 going in to today. i know that the vice president was engaged in conversations last night. we still don't know all the outcomes. you know, there's -- >> -- $500,000 -- >> that's not been the -- i think that would be very difficult. look the president -- >> not impossible? >> no, no, no. i think it would be off the table in the sense that the president had put a $400,000 threshold on the table, as part of a larger agreement, and frankly we'd be all much better off if we had the larger agreement, the speaker hadn't left those talks. that is part of a larger deal. it's hard to do 400, even as part of a -- >> but that had a c.o.l.a. thing in it that's now out. you can do five if you do no social security? >> i don't want to negotiate on-air here. >> you won't say -- you won't just nod to me? >> got to wait -- >> is that a wink and a nod?

>> here's the issue. the issue, joe, as you know, is that we're trying to come up with a long-term deficit reduction plan as we get off the fiscal cliff and that requires cuts, additional cuts, but it also requires additional revenue. and as you know the higher you take that threshold, the less revenue you come in, and then you upset the balance between cuts and revenue. so if you're going to get less revenue, it means down the road you're going to get less cuts because the president's principle's been pretty clear. that we're not going to balance the budget on the backs of middle class families. that everybody has to share responsibility. and so, the less revenue you generate our republican colleagues need to understand this, it means the less cuts you're going to get because the president was really clear yesterday, you can't ask a medicare recipient who has a median income of $22,000 to shoulder more of the burden when you're still not asking people making a whole lot of money to pay a little bit more. >> the cuts are just cuts in -- cuts in actual growth? they're not actually cuts from -- >> number one, that's absolutely

true. some of the cuts the president talks about are just ridiculous. he's going to count money we're not going to spend on wars we're not fighting in iraq and winding down in afghanistan. that's not a cut. >> i know, chris -- >> interest savings. there's a lot of smoke and mirror. and frankly what the president's most insistent on is we never have a balanced budget at all. he's never presented a remotely credible plan to do that. i'm actually with chris. i think we've got about a 50/50 shot to get this tax portion. >> they come out with a 400,000 or 500,000 income tax hike threshold, could that pass the house? >> number one, yes, it would pass the house. number two, i don't think that's a tax hike. i think that's take being tax cuts and making them permanent. i've never accepted this idea. current law is taxes are going up on everybody. so how can keeping that happening for 98% of the people -- >> that's the magic formula. >> -- possibly be a tax increase. so i think it would pass. but it's not going to solve the fundamental problem. there's not enough revenue here remotely to do that. actually, my argument has always been, let's get this done, and

let's move on to ground our democratic friends are not very comfortable with which is spending cuts and entitlement reform because that's where a real long-term deal has to happen. >> let me just say, you know, if tom cole had been part of these negotiations from the beginning, probably we wouldn't be here on the precipice right now. because i accept his premise, which is, what we all know -- >> you saying he should be speaker? >> that's really helping me a lot. >> i don't want to get my friend in trouble here. but what i'm saying is we all know that starting, you know, tomorrow, all the taxes reset. we have a $5 trillion tax increase. so what we've been saying is, look, let's just make sure that we don't allow the vast majority of the country to get hit. we need to reduce our deficit. and so it's important to ask folks at the very top to go back to paying their clinton-era rates on the amount of income above $ 250,000. and tom was right about that. >> i'm not trying to get him into trouble. i don't see it that way. you couldn't get me in any more

trouble. but seriously, republicans need to step back here, take a breath and say, look, we couldn't make the bush tax cuts permanent for anybody, when bush was press we had both houses. we're on the verge of getting at least 80%, maybe more, for at least 98% of the american people. that's a huge win. and once that revenue is off the table it's going to be very hard for democrats to ever put it back on the table. it actually forces them towards spending and entitlement reform in places they're historically uncomfortable. >> chris would you be more comfortable if we went back to those rates to consider a simpson-bowles overall tax reform? is that just gone? you know, the rate there was 28%. once you get back to 39% isn't it going to feel so good to all you guys -- >> emotionally it was 28%. >> it's even lower than that. >> no. they were playing games with what you could do if you took away all deductions. take away the mortgage interest, take away charitable. >> have we given up on that?

we would broaden the base. >> they did something else which i think people don't know. they assumed as their starting point, frankly, that rates would go up before they began their tax reform process. in other words -- >> that is what's happening. >> but built into the foundation of simpson-bowles, which is higher income rates on folks over 250 would go up, and all their savings through tax reform were generated off of that baseline, so to speak. so a lot of people didn't realize that built into simpson-bowles is actually a whole lot more revenue over ten years than even the president's 1.6 trillion dollar proposal. >> that's threw. true. so here's my point, i just caution my colleagues because they keep trying to reduce the amount of revenue we're raising and tom says well we're going to come to cuts after this. well the reality is that, the president's principle of balance will be violated if they're going to take revenue off the table at a relatively low amount. >> again -- >> but the revenue -- >> becky, we're going to bring her in at this point. but we want to get at some of

the really wealthy people. this is not the way to get at them with ordinary income. they're still not going to -- the beauty of simpson-bowles is you finally -- >> you want to go much higher on capital gains and dividends? >> that's the discussion we need to have. all this other stuff is n not -- -- >> that's right and the president had a proposal, one part of his proposal did not increase rates as you know but actually would have limited overall deductions to 28%. sort of across the board and that met the republicans' requirement of not raising rates. so that may be something we have to revisit. >> sorry, becky? >> question for representative van hollen. we heard something right at the beginning that made all of us sitting around the table kind of perk up. you said something about how 400,000, that threshold, is off the table, that we're back to 250,000. that makes me think that there's little chance that any deal that the senate brings together is going to get passed through the house, because you would need some coalition of democrats and republicans to get to those numbers.

and if you're changing the goalpost that we see right now again, i mean we assumed it was 400,000. are you saying you wouldn't vote for a deal that was anything about 250,000? >> no, i may have been misunderstood. the question originally was 500,000. and my point was that the president had put on the table 400,000 dollars as part of a comprehensive deal. so you're not going to get any threshold higher than 400,000 as part of a slimmed-down deal. that was the point i was making. >> thank you. >> one of the things we learned from jared earlier, i don't know if he said this on the air or during a break, the idea that this $400,000 number actually only applies to income, and that still is part of the conversation when it comes to dividends and capital gains, we're talking about a new 20% rate but for those people who are already making only $250,000. is that right, jared? >> yeah, that's about right. in other words the higher rate would apply to $400,000 and up or $450,000 and up is the current discussion, but the elimination of deductions and the higher rate would start at

250. that sounds like the deal as i understand it. >> that feels like a new wrinkle to me, representative van hollen. >> well, there have been a number of issues with respect to what rates would apply to capital gains and dividends and when that would set in. in other words you don't have to have the 400,000 threshold apply to having capital gains and dividends, for example, going to 20%. you could actually have that begin at 250,000. of course, under current law that's exactly what would happen, in fact, for dividends it would go back to, as you know, to ordinary income rates. so, there's also a question about so-called pep, the right to phase out of deductions. does that apply at 250,000, or does that apply at 400,000? there are lots of different versions of how these pieces could come together. >> congressman cole, let me ask you something about the republican demand on spending. because we hear from republicans all the time the president's not getting serious on spending. where exactly do you guys want to get serious on entitlement

spending? we've heard chain cpi. we've heard medicare eligibility age. but remember, your nominee ran against president obama for supposedly cutting medicare in the health care deal. and the ryan budget deferred all of the cuts in social security and medicare way out in the future. >> well, first of all, you're talking about social security and medicare, and the ryan budget was silent on social security. actually thought we should have talked about it. those things are always in the future. you start adjusting eligibility rates over time. >> what are the ten-year entitlement savings right now? >> well, frankly, honestly, if you did lower the age, number one, that would start right at the very end of that window. secondly, you can do -- we want means testing. we've never made any bones about that. that hits mostly upper income people. but we haven't seen it and we haven't been able to get it through. the cpi thing is another one. there's a whole variety of things you can do.

they've got to be done in a bipartisan way. they've got to protect current recipients and be phased in. >> do you think that republicans -- entitlement -- >> in fact if you look at the letter speaker boehner sent to the president sometime ago he talked about $800 billion in health care savings. he didn't identify a single penny in there, tom, and it is an absolute fact that in the coming ten-year window from the last budgets, the president's budget had more medicare savings, on top of the health care savings -- >> that's not true. >> tom, it is. >> the republicans are going to spend more on medicare than democrats. >> i want everyone -- >> go ahead and fact check this. the president's budget he submitted over the ten-year period of that budget had more medicare savings than the republican ryan budget. why? because the president did it in different ways. for example he asked pharmaceutical companies to go back to paying the rebates that, by the way, they were paying back in 2003. >> here's a political -- >> -- a good point. the fact is republicans keep talking about all these cuts, but they don't put them on the

table. >> that's not true. the ryan budget passed. the president's budget couldn't even get a democratic vote. the same old -- >> but it doesn't have ten-year savings in it. >> as you move through premium support, it does. now, again, there's a -- when you say the president saved $700 billion on medicare. that's not because he takes it and spends it. if we just leave it in -- >> trillion going to save on obama care in the first ten years and then the ten trillion in the next ten years and by adding 30 million new people? >> right. >> who aren't going to be paying -- >> the way the republican budget saved money frankly was they slashed medicaid. in other words, according to the congressional budget office, by the year 2020, they cut medicaid by one -- >> no. >> that is exactly what you're -- >> no it didn't. >> corker says when the president said he was cutting a trillion on "meet the press," corker says that we don't have a single -- that's not one aspect of that trillion dollars has been actually identified. is that -- >> that's absolutely true. and again the only thing --

>> -- more savings -- >> we're not going to fight and interest savings from money we're not going to borrow. that's smoke and mirrors. >> what if you're the public sitting at home right now. they're mad at both of you guys right now. they're mad at the president. everybody's got figures that seem to indicate the opposite of what the last person said. >> it really is important that everybody do their homework. this is part of a national conversation. the trillion dollars in savings that was part of the budget control act is projected savings over the next ten years by tapping the level of appropriated spending, the kind of spending that tom and the members of the appropriations committee do. they will have to live within those caps for the next ten years. they'll have to figure out how to achieve those savings. could a future congress undo those caps? sure. but a future congress can do anything. but those savings are baked in through these caps. >> we're spending in appropriate money $100 billion less than we were two years ago. so the appropriated part of this

process is actually under control and we're making progress. our problem is our friends won't touch entitlements. they don't want to do cpi. they don't want to do the simple things like gradually raise the age. you don't start doing those things, that's where the money is. there's just simply not enough money on the other side. >> let's point out that that was not in the republican ryan budget. the president has talked about doing some very difficult things as part of a larger agreement which is why, frankly, we would have been much better off if the speaker had stayed in the negotiations. >> i've got to go. gentlemen, thank you. appreciate it. it's amazing, everyone's telling the truth but it's the opposite of what the last person said. there's a way to do that in washington. i don't know how. >> right? >> it's like almost sleight of hand. >> there's a way to do that everywhere. >> all right. back to becky in englewood cliffs. >> we've been having our own discussion here on set based on everything you guys were talking about and trying to figure out if the debt ceiling is part of this conversation or not and if it's not, what does that mean? we're right back at square one once we get through the new

year, even if there is a deal because you've got to talk about it all in the next five years. >> it's a little depressing. >> we're going to be talking about this for quite awhile. we will have more discussions with our guest hosts here around the table about this. plus a special report on the housing sector in 2013. still to come, lawmakers sound off on impending fiscal cliff, tax increases, spending cuts. and gridlock in washington. we'll tell you what happens after the first of the year.

let's get a check on the markets. scott joins us from the cme in chicago. the senior vice president at preon group. scott, question for you, we've been looking for a bigger reaction in the futures. we thought if we got to the last day and there was no deal the markets would have a much bigger sell-off. is this something that the market says yes, we think there will be a deal reached at least sometime over the next several days? >> yeah, i think the market does think there will be a deal ultimately reached. the market is afraid that it's not going to be a very good deal. we could have a preverse reaction where we go over the cliff but the cliff is clarity and we can work from there.

if we get a band-aid deal the market will take that worse than even going over the cliff. it will be interesting to see how that shakes out. but ultimately i think the guys behind me right now, we want to find out what's going to happen with the 10-year rates at 170. we could be 1% or 2.5%. it will be interesting to see. >> okay, so of all of these discussions that are taking place, you guys aren't taking them all that seriously. you're thinking that there's going to be some sort of a solution that comes out of this. what happens if there's not, and this is something we go over the cliff and we stay there for two, three weeks? >> well, we have a trading saying called the dheepest cuts -- the best cut is the quickest and it's the cheapest. so we could take our pain early and then we have something to work from. so the cliff could be actual clarity. rather than have some band-aid deal that we continue to drag through until we start to talk about the debt ceiling. i think that ultimately a band-aid deal is going to be worse for the market rather than a cliff. the cliff might have us go over faster, sooner and have the markets take 1% or 2% or maybe

3% drop right away. but ultimately i think that the bad news from the long-term will be a band-aid deal. >> scott, we will have some stuff to think about and talk about later in the show. happy new year. >> no problem. >> scott shellady from treon group. we have more from our guests, and coming up at the top of the hour, the fiscal cliff is just hours away with the defense industry expected to be hard-hit immediately. we will tell you how the pentagon is preparing for drastic spending cuts, that's coming up at 8:00 a.m.

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fwl >> coming up, still no deal to avoid the fiscal cliff. senators ron johnson and bob corker, if a bargain is still possible organization if the fiscal cliff is now inevitable? plus a "squawk" market master is going to tell us how equities will react. mohamed el-erian is going to be coming on to weigh in. and 2012 marked a real turnaround in housing. major mortgage settlement gave thousands of borrowers a break on debt and a bottom in home prices pushed would-be buyers off the fence. here's diana olick with the outlook for real estate in 2013. >> the housing market will continue on the road to recovery, barring any unforeseen economic disasters. that's not a prediction, that's a fact. as the jobs picture slowly brightens households formation is expected to grow off its lows and that's good news for both the home builders and for investors in the rental market. housing starts, which will end

in the 800,000 range this year, should top the 1 million mark in 2013, as big builders continue to see a jump in new orders, and investors continue to compete for distressed homes that used to be the builders competition. and speaking of distress, fewer loans will become newly delinquent in 2013. but the 5 million already delinquent loans will head to foreclosure at an even faster pace as states requiring a judge in the process finally put their collective feet on the gas. and home prices, the key to recovery, should also continue their gains. 2013 could bring annual appreciation nationwide of 3% to 5%. but price recovery will vary widely market to market. there are, of course, still many unknowns facing housing, first and foremost new mortgage regulations set to be unveiled in early 2013. increased mortgage availability is the key to a robust recovery.

debt talks in the senate proving fruitless as each said failed to agree to the other's demands. >> the mission. that's a bit of a problem. >> the last-minute bargains today. will our elected leaders take us

right off the fiscal cliff? joe kernen and john hoarwood are live in our nation's capital. senator ron johnson and bob corker are going to bring us the latest on the debt talks. and then squawk market master mohamed el-erian is going to break down the market implications of a government failure. the third hour of "squawk" starts right now. ♪ ♪ when you've got a problem you've got to rise above it ♪ ♪ when you see the challenge you've got to rise above it ♪ >> welcome back to "squawk box" here on cnbc, first in business worldwide. good morning, again, everybody. i'm becky quick along with andrew ross sorkin. joe kernen and john hoarwood are with us live from washington this morning. they're there trying to fix the fiscal cliff all on their own. our guest hosts this morning are jared bernstein, former economic adviser to vice president biden and tony fratto, former deputy press secretary to george w. bush. this hour we're going to be joined by senator ron johnson, pimco's mohamed el-erian and senator bob corker to talk all

things fiscal cliff. first before we get to all of that, andrew has your headlines. >> before we do that, i want to wish everyone a happy new year. in sydney, australia, which is 17 hours ahead of us, and they are celebrating right now. so, -- >> auckland, which started at the 6:00 a.m. east coast time. now you've got sydney. so, yeah, cliffs falling all ear the world. >> that's right. are they going to have fireworks in d.c. tonight? i don't know. but -- >> before or after -- >> the question does the cliff -- >> okay, let's get -- >> there will be drinking. i can guarantee that. >> that might start this afternoon. >> let's get some of the headlines. the senate is going to be reconvening today at 11:00 a.m. eastern time. yesterday senators held a rare sunday session in an effort to work out a deal. talks, though, as we talked about all morning, they did break down on the issue originally of chain cpi. a different way of measuring inflation that republicans want to use to calculate cost of

living increases for entitlement programs. negotiations between restarted late yesterday, and as john hoarwood reported, there has been some encouraging signs in talks between gop leaders and vice president biden, who's now leading things for the democrats. last night on cnbc, former pennsylvania governor ed rendell urged lawmakers to rise above politics and get a deal done. >> if the sticking point to a big deal that takes care of the debt is chained cpi, i think the president's got to go to harry reid and he's got to go to nancy pelosi and say, look, this is not the way i would have done it, but we've got to reach a consensus, it's going to be good for the programs ovnd it's going to bring them back to solvency. >> okay, so here's what else is on the schedule today. the house is going to be reconvening at 9:00 a.m. eastern for debate followed by legislative business. we'll see how things pan out. of course, bring you all of that throughout the day. in addition to all of that, we now have news that the pentagon is preparing to lay off 800,000 civilian employees if a deal is

not reached to avoid the fiscal cliff by january 2nd, automatic domestic and military spending cuts will kick in, and the pentagon would be forced to cut 55 billion dollars in spending in the first nine months of 2013. there are a lot of worries in the defense industry, in government, about what that ultimately will all mean. let's take a quick check on the markets, see where things are headed, as market gets ready to open. dow looks like it would be off about 62 points. nasdaq would be off about 15 points and the s&p 500 would open off close to eight points. of course that is not nearly as bad as some people had been anticipating. take a look at where asian markets ended the hang seng down only marginally. shanghai composite up and nikkei up morning natalie. flip over to europe right quick. fat si 100 off marginally. cac and what's going on in spain, also up marginally. we haven't seen the kind of movement that some people had been talking about on this last day before the fiscal cliff would be reached.

>> back to washington now, joe kernen and john harwood are joined by a very special guest. >> thanks, we'll get right to that, andrew. if you were in australia right now and you were a multimillionaire and got kicked in the head by a kangaroo and died, would you owe 55% on -- >> only if you were a u.s. resident? >> right. >> so if you're a u.s. resident and it happened right now you'd owe 55%. >> for anything over a million. >> are you over the cliff in australia right now? >> working at the u.s. embassy i presume. that's a good point. >> i wouldn't go anywhere near the kangaroo. >> u.s. time, baby. >> u.s. time zone counts. >> you sure? >> yep, 2013 in australia, john. >> doesn't matter. >> that's a foreign country, baby. >> i'm a thinking. >> in the embassy you would be under u.s. law, right?

>> that's u.s. ground. >> u.s. time? >> the embassy -- >> all this debt. anyway, we are back here in d.c., a d-day for real. joining us on the set is republican senator from wisconsin, ron johnson, member of the senate budget committee and appropriations committee. who i got to just say, senator, you're like beside yourself. you're a small business owner. you got hundreds of employees. you're here working in the senate, i wouldn't call you an accidental senator. although they wanted you to run and you did it quickly. but you're looking around right now, and where do you think you are? alice in wonderland? are you -- >> it's an alternate universe. this place is a joke. bottom line, this is an absurd process. it certainly proves the genius of our founding fathers that government should be limited. i mean the fact that we have this place, having such an enormous effect on our economy, on people's livelihood, is wrong. it's simply wrong. so i'm a manufacturer. i'm always looking for the root calls of the problem. the root cause of the problem is that government is far too

large, fr too intrusive in in our lives, it exerts too much control over our economy. that's where we're at. i don't know many people who think government is effective. why would they think the governing body would be effective as well. this is a symptom of the overall problem and it's government has become too large and too intrusive into our lives. >> our forefathers were really smart. but you made -- brought up some points about what should have happened on either side with some of the bills that have been prepared in either house -- >> pass way last second. >> should have been brought up in the other chamber. >> in the senate, allow amendment process. >> or in the house. and then allow amendments and then it goes -- they talk about it behind closed doors and they hammer out amendments, till it's done. on the senate side harry reid has the power vested in him by the constitution to not bring any of these things up? >> he blocks it. this is a one-man dictatorship. under his leadership the senate has been a charade.

i serve on the budget committee. you know how many times we voted on a budget in the budget committee? zero. we haven't even marked one up. i mean that's -- >> if harry reid is a dictator how come nothing ever passes the senate? it's not because he's -- -- you could say john boehner's a dictator, too. >> harry reid does not allow amendments. he does not respect the rights of the minority. it's a real problem. so you know, the people elected me. they really don't have a voice in the united states senate, because you know, harry reid fills up the tree, i know it's a technical legislative term but we do not have an open process. what we should have done as soon as the house passed the full extension of all tax rates back last summer, harry reid should have brought that to the floor of the senate, we should have had an open debate, open amendments, we should have made legislators vote on things. take a position on things. actually involve the 100 elected officials in this process. instead, we're here at the end of the year, a couple of elected officials with their unelected staffs are doing these deals behind closed doors. i don't know what's happening

behind there. am i all of a sudden going to get a product sometime middle of the day and say you have to vote on it right away? that is an absurd process. america has to understand how broken this legislative -- >> -- votes -- >> always try to control the agenda to advance the interests of their members who are -- >> i know. this is a broken process. why do you want to continue to grow the federal government? we need to shrink the size of the government and that's really the side of the fence i'm on. what do we need to do to limit government? and let's face it, all that's happening with the fiscal cliff is we're trying to figure out whose taxes are going to go up and by how much. by the way, when we do that you know how much of that is the problem solved in terms of our deficit? 3% to 7%? we'll raise 35 billion to 75 billion when your deficit is 1,000, 90 billion dollars. how are we going to limit the rate of growth in government and spending? how do we start limiting the deficit? >> if you eliminated the medicare and social security problems, government would get a

lot smaller real fast. >> we should do that. but the other side takes that off the table. they take it off the table. you know how -- >> medicare and social security? >> no, they've taken it off the table in terms of discussing how to save those programs for future generations. we need to grow our economy. increasing taxes on small and medium sized businesses doesn't grow the economy. here are just a couple of numbers to prove the point. if the meager economic growth we've had since 2009, federal revenue has increased by $344 billion per year. if we just revert to a normal economy like we had in 2007 when revenue was 18.5%, that would add $435 billion per year of revenue. again president obama's proposal is going to raise $35 billion to $75 billion. a tenth of what economic growth will result in. so what we ought to be concentrating on is how to get government out of the way. get them off the back of small and medium sized businesses. even large corporations. let our economy grow. but that's not what we're talking about now. now we're just talking about let's punish success. it's just an absurd concept.

>> if the president were listening he'd say elections have consequences. i won. >> as did republicans in the house. >> yeah. >> they have a mandate from the voters that elected them, as well. >> okay. >> so both sides have got to recognize that. and come to terms, but the way to compromise is in an open process, where these issues are debated so the public can see them, that's not what's happening. we've turned the senate from a legislating body in to a deal making body and that's just wrong. >> i understand your philosophy and i resmek it but why is it punishing success to take the top rates for some small number of people and return them to clinton-era levels? why is that punishing success? >> because it is. you're increasing taxes on peel. and listen, john -- >> taxes -- >> i understand, so you're increasing the tax rate on people that actually invest that money in capital equipment, into working -- in other working capital to grow their businesses to create jobs. that's how you actually get more revenue for the federal government the effective way is by growing your economy.

you're going to harm economic growth by doing that. that's just basic fact. i don't know -- do you know if a tax increase actually helps the economy grow or helps create another job? >> what happened in the '90s after clinton- -- taxes were raised under clinton, the economy was pretty strong. >> that's because we lowered taxes and all these businesses that we created in the '80s came to fruition in the '90s you can get away with that for a short period of time. let's take a look at the 2003 tax cuts. when those were enacted federal revenues $128 trillion, four years later it's over $205 trillion. it grew with tax cuts through economic growth. far more effective. so -- >> excuse me. -- >> -- amount of growth, president obama has concentrated on growing government, scaring the you know what out of employers. everything this president has done has harmed the economy, decreased -- >> why is it recovering, though? >> it's meager recovery. >> yeah, but it is recovering.

>> because the american economy -- >> why isn't it worse than when he started? >> the american economy is a marvel, even with regulatory burden we're still able to get some meager economic growth. can you imagine what would happen if we take that regulatory burden off the economy, if we actually didn't threaten them with increased tax rates? if we actually increased certainty by making permanent tax rates? here's part of the absurddy, we've enacted these tax cuts, made them temporary. we created this fiscal cliff. that's absurd. that's what the government does. get government off our backs and this economy could take off. >> senator, thank you. we'll see. >> the packers. >> still? >> absolutely. >> -- through washington. >> that's what i'm saying. i was rooting for the redskins last night. that was a fun game to watch. >> becky, did you notice, where did we get -- took us that long to find a song called rise above? did you hear that song. >> we did hear that at the beginning. i was talking about spider-man, they sing it through spider-man

on broadway. that was a different version. >> can we commission that song? or did that exist in senate? >> it's actually me singing the backup. no! >> i wondered because it sounded like sorkin was the reggae thing. weren't you just in jamaica? >> i was in jamaica. we recorded that while we were down there. >> this is where we come together. we're not allowed to play any beatles stuff. >> we're not? >> no. ixnay on the beatles. >> now i have the kangaroo song stuck in my head. >> why did i think of that? but it is not a good day to die in australia. not that any day is. >> no. >> your kids won't get anything. zero. >> all right. joe, we will check in with you and john in just a little bit. when we come back, though, placing for the market impact if washington pails to get a deal to avoid the fiscal cliff. we'll ask pimco's mohamed el-erian what to expect. plus a senator at the center of fiscal cliff negotiations, bob corker will join us at the bottom of the hour. mohamed's not here on set.

i was doing a double-take. that was old video. but he will be joining us in just a moment. >> the fiscal cliff saga has almost reached its climax. just hours remain before the deadline. how will the movie end? will we go over the cliff or will washington save us from economic disaster at the 11th hour? wednesday on "squawk box,"d out how we land and what it means for your money. [ male announcer ] at scottrade, you won't just find us online, you'll also find us in person, with dedicated support teams at over 500 branches nationwide. so when you call or visit, you can ask for a name you know. because personal service starts with a real person. [ rodger ] at scottrade,

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welcome back, everybody. with the united states hanging on the edge of the fiscal cliff let's turn to a "squawk" icon for insight into the market's reaction. joining us from new port beach is mohamed el-erian, ceo and co-cio at pimco. this is the first time that we've spoken to mohamed since president obama picked him to head the u.s. global development council. so mohamed, congratulations on that, first up. >> thank you, becky. happy new year. >> happy new we're to you, too. we are right about to go over the fiscal cliff. is this the end of the world or

not, mohammed? >> it's not the end of the world. but it's not a good thing. what are the two things that anybody watching your show comes away with? dysfunction and polarization. the dysfunction in the sense that our congress can't get together to do the basic thing. and polarization in the sense that no indication that it will get better. so think of this very simply. if you are an investor, if you're running a business and you have to make decisions over a number of years, the uncertainty premium goes up. which means you price out certain investments in plants, in equipment, hiring, which is not good for the economy, not good for consumers and not good for the top line of revenue growth for companies. this is not a good thing at all. >> okay. this is not a good thing at all. and mohamed, it sounds as if you think this is going to be the situation kind of like the new normal when it comes to politics. we're going to be talking about this again and again and again. i mean, we were talking already about the debt ceiling being the

next negotiation. doesn't that sound like it's going to be part of the deal this time around, even though it's a small deal to get us over the fiscal cliff. does that mean this is the new normal in washington and what does that mean for economic growth? >> the new normal is the economy with an overlay of political polarization and dysfunction. look at the debate? we started with the hope of a grand bargain. then people said, we may not get a grand bargain but we'll get a mini bargain in the sense that we'll get a few things done but we'll have the momentum going into the year. now at best, at best we'll get a stopgap microdeal which doesn't really address anything at all and doesn't establish a momentum. so investors, people looking at the economy, are going to have to worry about how politics is contaminating economics. and that makes the new normal have chaos. so the new normal was sluggish growth. consistently high unemployment. and concerns about debt and deficits.

now, we have that as the baseline with we can either tip into a recession or if our poll tilgs get their act together we could come out much bigger. but the fatter tale is the possibility of tipping into recession. >> mohamed, this is jared. look, everything you say makes a lot of sense, unfortunately. but you know something about bond yields. how is everything you're saying, including the uncertainty premium, consistent with a ten-year treasury trading at 1.7%? i mean part of that is the fed. but is that the whole story? it certainly doesn't -- that metric doesn't seem to comport with the story you're telling. >> well it does jared for a simple reason. it's true not just for the bond market but for the equity market, as well. for the commodities markets, for the dollar. investors are saying, okay, we have bickering and differing politicians but we have the fed willing to build a bridge above them, right? so markets have been very focused on what the fed has been doing.

and the fed has been building a bridge with the hope that the politicians can determine the destination for this bridge. so, what markets have priced in is a hyperactive fed that is not waiting for the politicians to get their act together. it's willing to venture deeper and deeper into the unknown using untested policies, and that is what you see in markets right now. a big bet on the fed. >> mohamed in the last hour we had dan arbus come on and he was actually much more bullish and optimistic about the economy even if you take the fiscal cliff off the table. the suggestion was actually that coming into this we're actually in a much better position given the housing situation, given some of the new energy things that are going on, that maybe all of this doom and gloom is unfounded. fair? unfair? >> fair. undoubtedly we're in a better position today than we were a year ago. the housing market has healed. companies, especially the big

companies, are doing great. they have lots of cash, and consumer household balances are improving. so undoubtedly, the economy is healing slowly. but it's not healing at a critical mass. so unless government sorts out the headwinds, unless government corrects market failures and public goods issues, we're not going to have enough critical mass to get into higher growth, lower unemployment, and better income equality. that's the issue. >> that's the issue now. but mohamed, just going back and trying to figure out why the market hasn't reacted more strongly do this you think it's more of a bet on the fed than on the idea that we do see some sort of a patch or a mini deal that gets put together? >> a lot of investors have confidence in the fed and they have confidence -- >> confidence in the fed or they're afraid to go against the fed? >> both. both. they respect the fed. if another institution had a printing press in the basement you respect it.

and the fed has been willing to do more and more, right? and they don't seem to worry about the cost and unintended consequences of what they're doing. they're just going forward, if you like, and investors will now are happy to respect the fed. at some point, however, at some point, however, the fed is going to become ineffective in terms of what it can do, both for markets and for the ultimate policy objectives -- >> so mohamed, concretely, what is it that you're suggesting that the government could do, should do, if it was doing what you would like? are we talking about more fiscal policy, investing in infrastructure, in public goods? can you tick off some specifics that you think a functional federal government would be doing right now? >> so, a functional congress would first and foremost agree on a vision for the economy, consistent with what the president has set up. secondly, it will take measures to do the following.

one is sort out the fiscal issue which is medium-term reform with a bit of stimulus up front. second, invest in public goods that we know we need, we are lagging other countries in terms of infrastructure, in terms of education. three, restore the functioning of the housing market and housing finance. and four, improve the functioning of the labor markets. i think economists agree that these are headwinds to our growth and employment, and they need actions out of washington. >> all right. we're going to talk more about that. tony, you say we're not -- >> but we're not going to see those, mohamed, we're not going to see any of that stimulus up front, even in the very best-case scenario we're talking about a situation with significant fiscal drag even if they got a grand bargain right? >> that's why we're projecting next year a growth rate of 1.5% to 2%. because we're not expecting it either. >> thank you, mohamed. happy new year to you. >> and to you. >> when we return, bob corker is going to join us with the latest on the debt talks. ♪ [ male announcer ] this is karen and jeremiah.

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when we come back, we're going to talk more about frustrations in washington reaching a boiling point. up next, we'll make sure rick santelli's blood pressure is in an acceptable range. plus the mood from the traders in the futures pit. then the latest on the fiscal cliff negotiations from republican senator bob corker. [ male announcer ] at scottrade,

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welcome back to "squawk box," everyone. let's take a look at a few stocks that might be on the move. bristol-myers squibb has gotten fda approval for its

anti-clotting drug eliquis. it's designed to prevent clots in patients whose atrial fibrillation is not caused by clotting problems. facebook is experiencing a reacceleration of spending in the mobile category. and intel's earnings estimates have been raised by wells fargo. the firm says that intel's bottom line is benefiting from several factors including growth. >> let's check on the markets. we teased this by saying what would rick santelli's blood pressure be? he joins us from the cme in chicago. how is the blood pressure this morning, rick? >> well, you know, we're about ready to play small ball with the big issue. you know, whatever gets passed today, assuming something does get past the house, and remember any conservatives that vote for a dumb idea we're going to remember who you are in 24 months or less. november of 2014. but i think a bigger picture is,

it's debt death. it's deficit death. just like many people around here, what they listen to are a bit tone deaf. and to me that's the entire enchilada. the sense that you could get something going and pass something to get over the sequester. we want them to rise above and i wore the pin and i believe in rise above. this isn't rise above. this is meander over some artificial finish line, without addressing. rise above was concessions on taxation, which i think is a dumb idea. but a concession nonetheless. for some real reduction in deficit. and this, i don't see how any of this is going to be done. as a matter of fact, most likely the sequester gets removed. that was the only possible deficit reduction embedded in the system. my blood pressure is still high. >> what's the sense of it on the floor? what's the betting line among everybody behind you right now? >> well, i think the betting line is if you think that anything that any of these

people are going to do, pro or con, with their investments, based on anything that's going to happen in washington, the next hour or the next three weeks, i think that that is a crazy notion if you're looking at the health of the country. now if you're looking at the immediate health of your portfolios, which we do at cnbc, that's very important. but we shouldn't mix our metaphors here. these guys aren't going to be able to price in what's good for the country, what's good for your kids, my kids or their kids. it's only going to price what's good for an investment in a world awash with central bank liquidity making for the next hour, the next day or the next week. >> so, rick, this is jared. in terms of markets, then, are you saying it just doesn't really matter that much whether we go over the cliff or not? i think in terms of the markets at this point, probably not. that doesn't mean you're not going to see some, what we call discontinuous volatility jared. meaning you get a little interaction up or down. but in the end you're not going

to see these guys or the bond lidge ranties or anybody be able to rise to the occasion to truly price in the fate of our economy until they could dry out from the drunken soak of central banks. >> are there bond vigilantes today, rick? >> yeah, they are. they're in hammocks, enjoying free money from the federal reserve. they're in institutions that deal in mortgage securities. how many mortgage securities do you have, jared? or how many mortgage securities do you have -- >> i don't even have a mortgage, rick? i'm a renter. >> see, well that's the point. >> i subsidize mortgage holders. >> disguised as middle-class benefits really are benefits to the players that are the toe keepers for certain markets. but in the end, you know, even what the federal reserve has done to housing, it gets boggled up a bit. i think looking at these guys is important. this is what we do for a living. people watching want to know what the movement is, minute to minute, hour to hour, day to

day. but this is not, will not, and hasn't been for a long time, a barometer about real economic health. >> so, rick, a deal, you know, there seems to be a little bit of optimism about maybe a deal, and by the way -- >> maybe there's optimism over there. why are you optimistic? are we going to walk away -- jared -- >> i'm kind of with you in terms of the small bore issue. are you suggesting that if a deal -- i'm just trying to be concrete here. if a deal is not made, if things crash and burn tonight on the short-term small ball deal there won't be a sizable correction? i mean, maybe not double digit, but a sizable correction in the equity markets? is that your prediction? >> i think there may be a sizable correction in the equity markets, but i think that the half-life of that correction will be very short-term. the market's not as dumb as the politicians think the people are. everybody knows that they're both going to get something done. and i think that the market ultimately is handicapping any deal, because the deal isn't

going to make a huge difference. where you're going to see the market get a little more ram bunk schulze is when we get to some sense of leaving the twilight zone and going to the dark side with record to the debt ceiling. now that's a real issue. and in 2014 -- >> we need to talk about that. >> we go to an election in 2014 we're going to have between a $20 trillion and $22 trillion ceiling. that's going to be the complete talk of the next midterm elections. >> okay, mr. santelli. we'll be talking to you-ish. >> happy new year to you guys. >> we'll see you on wednesday on the other side of the cliff. >> all right. when we come back, he has been a leading voice in the senate during these fiscal cliff negotiations. republican senator bob corker will sit down with joe kernen and john harwood right after this. as we head to a break right now, take a look at the futures.

welcome back to a special edition of "squawk box." here's joe kernen, and john harwood, live from our nation's capital. >> i'm saying is you -- >> we are back with a special guest, senator bob corker is here with the latest on the fiscal cliff negotiations. and we'll get to, since you're privy to what's happening, john is also hearing things. but first of all, you wrote a

letter to president obama after his appearance on "meet the press." >> yeah. >> after he said i have proposed a trillion dollars in cuts. and i just asked, who did we ask chris van hollen, seemed to think he had delineated all the cuts. you're saying out of the trillion dollars is a faux number? >> i mean, have you ever seen -- >> i don't know. >> that would be really helpful to us. >> where's he get the trillion, john? >> let me -- i promise you, they've never been laid out. and so, you know, we have the debt ceiling. let's face it, we're going to make it through this. and nothing is going to happen that has anything to do with deficit reduction. and unfortunately -- >> what is going to happen, though, short-term for bob mcconnell? >> i think that the discussions are going very, very well. and biden -- >> what is the income threshold going to be? >> i don't know. somewhere in the -- >> four or five? >> i don't think it's 400,000 to 500,000 would be my guess, okay? so we're going to end up out of this. >> estate tax?

>> let's let it play out. we'll see in the next several hours. but i do think there's going to be a resolve to this. the problem is, you know, we created this fiscal cliff to make some tough decisions. and none are going to be made. not one. and so we're going to end up carrying this on now to the debt ceiling, which will be serious. i mean, that will be a serious moment. and our economy is not going to be what it could have been. i mean, we should have made all these decisions. this has been going on now for 24 months. and so this is going to be a disappointment no matter what. we'll eke by this. but then the real discussions will begin. that's why i wrote the letter yesterday to the president saying, look, you know, it would actually be really helpful to our nation and the dialogue if you would lay out what these are. lamar alexander and i put a bill in this week, raising the debt ceiling by $1 trillion with $1 trillion worth of entitlement reforms, but the president has a list that would be very helpful. but there is no list.

>> let me ask you about that. because we hear a lot from the republican saying the president you need to lay out entitlement -- >> which i did last week. >> fair enough. >> and very specifically. >> fair enough. let's talk about republicans as a whole. the john boehner has said chain cpi. and medicare eligibility age. >> right. >> those are the two things that he's laid out for medicare and social security. >> right. >> your party's nominee last year ran against obama -- or in this campaign ran against obama for cutting medicare. what are the specific entitlement savings that you guys want to enact? because that's your ask of obama. he's told you what taxes he wants to raise. >> i've got a whole list of them. i mean, certainly starting with chain cpi, but the age, the copay, means testing. >> he's agreed to that. >> betting on competitive situation in between medicare manage and deeper service without any cap i mean it adds up to about a trillion dollars. and when you have a situation where americans are paying one-third of the cost of

medicare, i don't think people realize that, but literally people are paying one-third of the cost of medicare, we have 20 million more americans coming on medicare over the next decade, i mean it's a time bomb. >> i agree with you it's a time bomb. but remember that the -- the standing document for republican boldness is the ryan budget. you get credit for that. he did not have ten-year savings on medicare and social security. >> and i do. i think we obviously need to be much bolder than the budget you're talking about. because otherwise as you mentioned, if you're going to protect everybody that's 55 and older, there are no savings over the next ten years. >> that's my point. >> so that's why we offered what we did last week on the floor. and what i hope is going to happen over the next, you know, 75 days, is we really tackle the deficit issues. because by the time the dust settles tonight, tomorrow, whenever, it's almost irrelevant at this point when it happens. it's going to happen. it's probably going to happen today. but we will have done nothing

after all of this, after all of this looking like a joke up here. we will have done nothing to solve our problem. >> jared wants to ask a question. but when you write a letter, did it have your return address that says senator bob corker? did it say that? he knows it's from you? >> he knows how to reach me, and -- >> did he -- >> we've had cordial conversations. >> i feel bad for you because your letter, i think it's no better than if i write run or my kids write one. did you hear anything? did you get -- >> well, he has my cell phone number. >> did you hear anything yet from the letter you sent him? >> it was just yesterday and he was probably -- >> do you expect to hear anything? >> you know, i do -- let me say this. >> you basically you're not going to get an answer? >> well, i think -- i think you guys ought to help tease that out. i really do. and i really do think it would be constructive. i know ron johnson was on earlier. and i think the last thing we need to do with another one of these disasters is have another

back room deal. i mean, we could have actually done this on the senate floor, there was a willingness by democrats and republicans, seriously, just to -- we could have passed this out on the senate floor over the last 72 hours. you guys could have watched the nation could have watched, it would have been a healthy thing. so, so my point is that the president will come forward with that list instead of in private negotiations with speaker boehner. seriously, this would be a very healthy thing over the next 75 days. >> let's let jared get his question in? >> senator corker, this is jared. it's great to hear you this morning. one of your colleagues this morning said something to the effect that the u.s. economy's biggest enemy right now is the u.s. congress. and when you hear you talk about the debt ceiling and the dollar for dollar trade you're talking about the president said he doesn't want to go there, i get very worried that if you really didn't like the fiscal cliff's impact on the economy, boy you're really going to hate this

next dust-up over the debt ceiling. i mean, i just don't see why this economic recovery has to go through that. is there anything you can tell us to make us feel better about that potential fight out there? >> the futures suddenly, i don't know, maybe they'll hear things first but they're only down 20 points now. they were down 80 or 85. so -- >> look. >> maybe it's you. >> i do think something is going to happen. i think it probably happens today. so i think this little thing we're dealing with now which candidly is inconsequential as it relates to dealing with our deficit. it's very consequential to people paying taxes. but, no the debt ceiling, that's why, jared, i've gotten out way in advance, and that is to say, look, let's pass a bill now. let's don't wait until march the 15th and everyone worry about our credit. but it is unfortunate. i mean we did not deal with anything relevant as it relates

to our national deficits. we haven't done that. and so unfortunately, that is going to be the next line in the sand. and i agree with you it's a much more problematic line in the sand to have. and that's why we need to do it way in advance. i mean we need to go out and pass it, but it has to be accompanied, in my opinion, with at least a trillion dollars in entitlement reforms. otherwise the investing public, regardless, at some point is going to say, you know, this nation just doesn't have the will to deal with this issue. >> senator, might have been you. thank you for coming in. you did sound cautiously optimistic. that's like cautious optimism is now replacing -- >> moderated -- >> i think the president said modestly optimistic. >> that's one of those phrases that is going to get banned. modestly optimistic. >> i would agree with our nation's leader that i am modestly optimistic. >> maybe you could put that in a letter. send him another letter. it will end up where the first

one ended up. thank you, senator. we're going back to you now, andrew. >> thanks, joe. coming up more from our guest host, tony fratto, jared bernstein. plus the latest owe box office. quentin tarantino's latest offering giving the hobbit a run for its money. [ male announcer ] how do you trade? with scottrader streaming quotes, any way you want. fully customize it for your trading process -- from thought to trade, on every screen. and all in real time. which makes it just like having your own trading floor, right at your fingertips. [ rodger ] at scottrade, seven dollar trades are just the start. try our easy-to-use scottrader streaming quotes. it's another reason more investors are saying... [ all ] i'm with scottrade.

welcome back to "squawk box." take a look at the implied open right now. this could have come after bob corker suggested we might get a deal possibly today. things have turned slightly opposite. dow looks like now would be off seven points. s&p 500 off marginally. they keep going back and forth. clearly, much better than some people had anticipated. let's talk a little movie news this weekend. "the hobbit" kept its number one spot at the box office, taking in $32.9 million in north american ticket sales. jango unchained was a close second. very controversial film. and les mis.

>> one day more should be our theme day. theme song. >> excellent. coming up, a look back at our favorite squawk moments of 2012. plus the last word on the fiscal cliff.

welcome back, everybody. take a quick look at the u.s. equity futures. they actually turned positive moments ago. the dow futures down by 4 points. the nasdaq looks like it would actually open in the positive at this point. we did see some incredible improvement. there are a lot of stories floating around. there could be a deal that could be reached, we spoke with senator bob corker a few minutes ago, he said a deal could come today. optimism that a deal would be reached that would push off any sort of big drop, we'll continue to watch this. as we prepare to close out the year on squawk, let's take a look back at some of the memorable moments of 2012. >> this is the lovely and intelligent becky. >> hi.

>> "squawk box" begins right now. >> i think the egg must have come first. but i'm with you. >> can i try that one more time? >> no! >> just hold on. start right there. >> you can talk about my toupee. >> if you don't rise above and sink below. >> joe? it's your conscience speaking. >> hallelujah. >> all around the mulberry bush the monkey chased the weasel. >> did it involve taking your clothes off?

>> if we don't come in at 6:00, who's going to come in? andrew? andrew? >> have we heard from him? >> no. but you know what would be fun? why don't we call him. >> the show must go on. have you ever heard of that expression? >> oh, now he comes in, so we've got to drop everything? >> hey, i did an interview. i'm coming in when i want. >> i know what you're looking at. >> you look good. >> i'm not mr. fashion. the introduction of andrew's -- it's in the prompter. the introduction of andrew's zipper sweater. >> i could start wearing a hoodie. >> we're looking at my brown shoes. >> i may be in the market for a car. i have a budget for a helicopter. >> yes, all this from a guy --

>> there will come a point where you'll make him cry. make him cry. >> don't tape me when i'm listening to andrew. >> you're never going to win an emmy. >> you would be skiing, and here comes a mogul. wow! >> everybody is -- i can see -- eat your heart out, joe. >> i've got to do the end of this. >> can't you read that? >> did the mayans actually know where greenwich was? >> i like to party. how many guinnesss after that? >> that was great. there were bugs flying all over me. >> it's too late for me.

the horse is already out of the barn. >> i watch basketball. i watch "squawk box" in the morning. >> i can go back to bed. >> squawk is like a cocktail party in the morning. >> that's it? >> wow. that is a year of things we thought weren't making it to camera. we want to give a special thanks to our tape producer. he does incredible work for us all year long. he's taking notes just about every day of the show. thank you. we really appreciate it. >> didn't it used to be that only stuff that was on air was usable? >> but they changed things a little bit. >> everything's -- >> yeah. >> i'm sure that will make us behave from now on, right? >> yeah, we'll be a little more careful. andrew, did you notice how much of that was about your